Should you save for retirement or pay down student loan debt?


According to a recent study by Hello Wallet, in most circumstances, it’s better to save more for retirement than pay extra toward your student loans, especially if one condition exists.

Here’s how the researchers came to such a significant conclusion.

Read more: These programs can help erase your student loan debt

Hello Wallet, a Morningstar company, recently crunched the numbers and found that the more student debt a borrower has, the more impact it will have on the person’s retirement — no matter their annual salary. 

Using a model to simulate an employee’s net wealth at retirement, Hello Wallet analysts wanted to find out under what set of circumstances paying more toward student loans created higher net wealth than contributing more to retirement savings. According to their research, there are only a couple of circumstances where paying student loans early equals more money in retirement. 

But, one thing is clear from the research: People who want to have as much money as possible in retirement should carefully examine whether paying off student loans early with discretionary income would really benefit them in the long run. 

Student loan debt at record high

There is no doubt about it, we have a big problem when it comes to student loan debt in America. Student debt has jumped to more than $1.2 trillion, up from $350 billion in 2004 — the biggest increase ever in history. Studies have been done showing the connection between student loan debt and life outcomes, but not much has been specifically researched regarding the impact of student loan debt on retirement savings. 

To come up with the numbers, Hello Wallet turned to data from its own users, including income, age and student loan balances — the group also used data from the Federal Reserve’s Survey of Consumer Finances. 

Read more: These cities will help pay your student loans!​

What causes a difference of $341,000 in retirement 

Using these two sets of data, Hello Wallet found that for every dollar in student loan debt, it would cost $.17 – $.35 in retirement.


So, a worker with $100,000 in student loan debt would have a $35,000 setback in retirement, and the study found this relationship was true no matter the age or income of the individual. The more student loan debt a person had, the lower their overall level of retirement savings. 

But the study also found that although there is no one-size fits all approach to retirement saving strategy, in most cases, maxing out retirement contributions after paying the minimums on student loans produced the most possible money in retirement.

For example, someone with a starting salary of $50,000, a student loan of $20,000, and an effective employer match rate of 5%, paying off a student loan early to take advantage of only half of the employer match resulted in a $341,000 reduction in net wealth at age 65.

These are some of the factors that contributed to the numbers:

  • The tax-preferential treatment of retirement savings creates opportunity for larger sums of money to accrue. 
  • Time: The longer the money has a chance to grow, the more earnings it will produce. 
  • Interest on student loan debt is tax-deductible for those with adjusted gross income below $80,000: A small incentive, but an incentive nonetheless!

Bottom line: If your employer offers a match on retirement savings, it makes more financial sense to take advantage of the match than paying extra on a student loan.

Read more: Is student loan repayment the new 401(k)?

Income-based repayment plans help, too

The study also found that participating in income-based repayment plans helped greatly. With an income-based repayment plan, you are limited in the amount of student loan debt you pay each month to a certain percentage of your income, freeing up your discretionary income to save more money toward retirement.

For example, a worker with a $25,000 loan who made $30,000 and opted into an income-based repayment plan that was capped at 10% would accumulate over $10,000 more in net wealth in retirement.

Two situations when paying student loans early results in more money in retirement

In the research, there were only two situations where paying down student loan balances made more sense over saving for retirement. 

  • If equity and fixed-income markets post weak long-term returns.
  • If individuals elect not to pay down their loans but then use their excess cash to fund consumption rather than retirement savings — basically wasting the money instead of putting it toward retirement.

Read more: 6 ways to eliminate student loan debt from your life


Study conclusions

The study authors concluded, ‘…we find that using funds that would otherwise be directed toward an employer-sponsored retirement plan to pay off student loans early rarely results in a higher net wealth at retirement, and that income-based repayment systems can be beneficial.’ They continued, “Paying off a student loan early does not make sense from a wealth-maximization standpoint.”

Here are some tips to keep college borrowing to a minimum

If you or your child are headed off to school anytime soon, listen up! 

You don’t want your college debt eating into your retirement savings, or any other type of savings, once you graduate. If you can avoid student loans, that’s your best option, but it’s realistic for most people these days.

So if you plan to borrow money for college, here are some tips to keep it to a minimum:

  1. Only borrow what you absolutely need to cover the cost of college.
  2. Graduate on time. (About 61% of people don’t, with big consequences to their wallets!)
  3. If you must borrow, cap it at what you expect to earn in your first year’s salary after you graduate.
  4. Consider public in-state colleges: These can save you about 50%!
  5. Work your way through school: This can help reduce the amount you borrow or help you pay it off quicker.
  6. Look for scholarships and work-study opportunities: There are tons of scholarships out there and if you’re eligible for a work-study opportunity through your school, that can save you big bucks!

Though so many graduates feel that their student loans are a huge burden, instead of paying them off sooner, from this study, it appears to be more beneficial in the long run to stash that money away in retirement — especially if your employer offers you a match on your money. 

Read more: 9 ways to pay for college without student loans

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